Here’s How Small Business Owners Can Prepare
The coronavirus pandemic triggered a global economic crisis, and placed the United States in an official recession as of June 2020.
Hardest hit by this pandemic recession have been American workers; in April 2020, the U.S. unemployment rate skyrocketed to a staggering 14.7% before eventually dropping to a still-high 6.7% in November 2020.
These were the highest unemployment rates since the Great Recession in 2009 and even mirrored jobless rates not seen since the Great Depression in the early 20th century.
After the devastation to the American worker, the next hardest economic blow caused by the coronavirus pandemic and recession was dealt to small business owners.
As of September 2020, the U.S. has lost nearly 100,000 small businesses because of this unprecedented and harrowing pandemic.
For the small businesses that are still alive today, the going has been anything but easy this last year, and they are still not out of the woods yet.
Further, these small businesses face another looming challenge born out of the coronavirus pandemic and recession.
There are a few reasons U.S. small businesses might be facing a tax debt crisis when 2020 taxes are due in April 2021.
First and foremost, the Paycheck Protection Program (PPP) loans that countless small businesses took on to survive the coronavirus pandemic and recession could lead to a surprisingly high tax bill when tax season rolls around this year.
On the federal level, these forgivable loans and the expenses they covered can be written off as tax deductions.
But on the state level, the tax code is not as uniform, and many small business owners will have to pay taxes on their PPP loan, which have gone upwards of $1 million, even if it is forgiven.
A second reason small business owners should be concerned about tax debt in 2021 simply pertains to the drastic declines in revenue that so many of these small businesses have dealt with throughout the pandemic.
With people strapped for cash and stuck in doors, small businesses have struggled mightily to generate revenue, and they very likely will not have the funds to meet their 2020 tax commitment this April.
The third cause for tax debt concern may not apply to as many small business owners, but certainly will for a good number of them. To keep their small businesses afloat, some small business owners had to do things like liquidate their stock holdings or draw from their own personal retirement accounts to meet payroll and keep the doors to their small businesses open.
LendEDU conducted a survey in December that found 78% of adult Americans are concerned about tax debt in 2021 due to drawing from a retirement account to stay afloat during the pandemic.
The LendEDU study on tax debt also found 72% of Americans are worried about tax debt in 2021 after selling stock holdings to bolster their finances during this trying time.
In summation, small business owners are set to face a challenging tax season in 2021 because of the coronavirus pandemic and recession and the actions it forced them to take.
But, there are ways to prepare for what figures to be a harsh tax season when 2020 taxes are due.
First, small business owners need to get an early head start on preparing their 2020 taxes for this April. Seek out professional tax advice now and make them aware of any financial moves you made during the pandemic to keep your business alive.
If you reach out today, you won’t be rushing to figure out your 2020 taxes right before the filing deadline, which is when tax professionals will become super busy and may not have time for you.
Second, if you do anticipate you are heading towards tax debt because of the pandemic or eventually wind up with tax debt, the worst thing you can do is ignore it and ignore the IRS.
Reach out to see if you can settle your tax debt with the IRS through something like an offer in compromise or installment agreement.
Or, you could employ a tax relief service if you do not want to deal with the IRS directly, and want a team of experts by your side when figuring out how to handle your tax debt.
The coronavirus pandemic and recession has been unimaginably harsh on people and businesses, and the negative impacts it will have on tax season this year is not yet fully known, but figures to be harsh as well.
By getting ahead of the competition and preparing yourself early for the 2021 tax season, you can keep your small business up and running.
In his role at LendEDU, Mike Brown uses data, usually from surveys and publicly-available resources, to identify emerging personal finance trends and tell unique stories. Mike’s work, featured in major outlets like The Wall Street Journal and The Washington Post, provides consumers with a personal finance measuring stick and can help them make informed finance decisions.
CTA: LendEDU helps people compare and learn about student loans, personal loans, mortgages, home equity loans, credit cards, insurance, small business loans, and more. At LendEDU, our goal is to help consumers and business owners make educated decisions when it comes to financial products and strategies without having to do all the legwork themselves.